Also: ■ Taking on an annuity

FINANCIALconnection

Debts in the family

By Suze Orman
I AM DELINQUENT on my mortgage and my
home equity loan. If my house is repossessed
or foreclosed, can these institutions touch my
retirement investments or garnish my salary?

Sandra D.

New York, NY

would still be entitled to the payout for nine more years before the payment stops.

As you can see, there are lots of options. The life-only option gives you the highest monthly payout but comes with the most risk if you want to make sure a spouse or beneficiaries will receive some money if you die fairly soon after investing in the annuity. With the joint and period-certain options, your monthly payout is lower than if you choose life-only, but if you want to provide some income for a spouse or heirs it can be a smarter move.

I also want you to understand that the payout you receive includes the return of a small piece of your principal each month. So you are not really earning 7. 5 percent. In fact, given that interest rates are currently so low, annuities purchased today are locking in some very low payouts. That doesn’t make immediate annuities bad—they can be a smart way to provide steady income—but you need to educate yourself on exactly what you are buying. One thing to consider is to purchase a $50,000 immediate annuity today, and then wait another year or so to see if interest rates rise; if you then purchase another $50,000 annuity, you will be locking in a higher interest rate.

Ask Suze
Orman

SOME GOOD NEWS is that bankruptcy law protects retirement assets. Any money in a 401(k) or a rollover IRA is fully protected. Additionally, money in an IRA that you have made contributions to, such as a traditional or Roth IRA, is typically protected up to $1 million.

d

MARC ROYCE

Wage garnishment is a different issue. In some instances, lenders have the right to sue borrowers who have not paid back the full amount of their mortgage. While most primary mortgages are non-recourse, meaning the lender cannot come after you for the unpaid balance, home equity loans and home equity lines of credit are typically considered recourse loans. (The rules vary by state.) So if the lender does seek a deficiency judgment against you, and if the courts grant that judgment, your wages could be garnished until you have paid back the home equity loan. So far lenders have not typically pursued these types of legal suits. If you are falling behind in payments, try to engage the lender to work with you to come to a resolution. For example, see if the lender will agree to a short sale, in which you sell the home, and if the sale price is below your mortgage balance, the lender will “forgive” that shortfall.

e

E-mail your personal-
finance questions to:
suze@costco.com.
Please include
“Suze Orman Q&A”
in the subject line; or fax to
(425) 313-6718; or mail to
Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088.

WE PLAN TO take on an annuity for $100,000,
for which we will receive 7. 5 percent for life,
through AARP with New York Life Insurance.
Is this a sound investment?

MY FRIEND IS unemployed and has $22,000 in credit-card debt. His wife is barely making enough money to pay their monthly bills. They have no property. He has about $21,000 in 401(k) and Roth IRA combined. Should he take out this money and decrease the debt as much as he can to reduce his monthly payment so he can still afford to pay it off?

Bob S.

Los Angeles, CA
Margarete R.
Oroville, CA

Suze will answer
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.

YOU ARE PURCHASING what is known as an immediate annuity, an annuity or a contract with an insurance company that will start to pay you income immediately for the rest of your life. But once you hand that money over to the insurance company it is theirs forever.

There are many payout options you can choose with your annuity. The most common is life-only. That means the payouts continue only as long as the person who takes out the annuity is alive. So, if you invest in a life-only annuity on your life today and then you die in a year, your spouse would not be entitled to a payout. If you choose a joint annuity, the payout will continue for as long as one of you is alive.

Some policies not only continue to make a pay-
out to the annuitants (you and/or your spouse) but
also guarantee payments to beneficiaries for a speci-
fied period, if you die during that time. For example,
suppose you take out a 10-year period-certain annu-
ity. If you were to die after year one, your beneficiaries
I COMMEND YOUR friend for wanting to make
good on his debts. That is something everyone
should aim for. But now that he is unemployed, I do
not want him mortgaging his future retirement secu-
rity to pay off credit card debt. I would encourage
him to try to negotiate a reduced payment schedule
until he is back at work.